Hold Eicher Motors Ltd For Target Rs. 2,790 - ICICI Direct
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Await firm volume growth before turning positive…
About the stock: Eicher Motors (EML) is the market leader in the >250 cc premium motorcycle segment (FY21 market share at 93.5%) through its aspirational models under the Royal Enfield (RE) brand, such as Bullet, Classic, Interceptor among others.
* Via its JV with Volvo i.e., VECV (EML has 54.4% stake), the company also has a presence in the CV space (6.4% FY21 market share)
* Strong net cash positive b/s with healthy return ratios metrics
Q3FY22 Results: Eicher reported a muted operational performance in Q3FY22.
* Consolidated revenues were at | 2,881 crore, up 28.1% QoQ
* Reported EBITDA margins came in at 20.2%, down 67 bps QoQ
* Consequent consolidated PAT was at | 456 crore, up 22.2% QoQ
What should investors do? EML’s stock price has grown at ~1% CAGR from ~| 2,500 levels in February 2017, underperforming the Nifty Auto index
* We retain HOLD amid lack of volume growth visibility in core RE portfolio
Target Price and Valuation: We value EML at | 2,790 on SOTP basis; assigning 28x PE to RE business & 25x PE to VECV business on average of FY23-24E numbers.
Key triggers for future price performance:
* We expect 11% (FY21-24E) RE volume CAGR aided by low base, abating of supply constraints, new products introduction (strong launch pipeline over next 12-18 months), network expansion benefits and higher exports
* Continued VECV outperformance in CVs to lead to market share gains; we build 27% (FY21-24E) volume CAGR as cyclical recovery gathers pace
* Overall FY21-24E consolidated net sales CAGR expected at 19.6%, with margins seen rising to 23.8% by FY24E riding on operating leverage gains
* Healthy return ratios profile with RoCE seen at ~18% levels by FY24E
Alternate Stock Idea: In our auto OEM coverage, we like M&M.
* Focused on prudent capital allocation, UV differentiation & EV proactiveness
* BUY with a target price of | 1,125
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